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Country Classification Review: The headlines

September 27, 2018

We announced the outcome of our latest FTSE Russell Country Classification Review this week. This process is aimed at providing portfolio managers and asset allocators with a clear view of expected future index evolution by classifying countries according to objective criteria, and engaging with stock exchanges, regulators and central banks in those countries where the market is being considered for potential promotion or demotion.

Here are six points from this week’s announcement you may have missed.

1. China A Shares

We’re pleased to announce that China A Shares, available via the Northbound Stock Connect route, will be assigned Secondary Emerging market status commencing in conjunction with the FTSE Global Equity Index Series (GEIS) semi-annual review in June 2019.

Since March 2018, we’ve been evaluating the China A market against the three access routes available to foreign investors: Qualified Foreign Institutional Investor (QFII), Renminbi Qualified Foreign Institutional Investor (RQFII) and Stock Connect.

China A now meets the criteria for assignment as Secondary Emerging based on market access via the Northbound Stock Connect program.

China A implementation summary:

Stock Selection: Constituents of the FTSE China A Stock Connect Index

Size Segment: Large, Mid and Small size designated securities

Portion of China A Shares being added: 25% of a security’s investability weight

Implementation Commencing: June 2019 (nine months’ notification)

Implementation Schedule: Three tranches - June 2019, September 2019 and March 2020

Size Tranche: 20% in June 2019, *40% in September 2019 and *40% in March 2020

* Implementation of Tranche 2 in September 2019 and Tranche 3 in March 2020 will be contingent upon the successful implementation of Tranche 1 in June 2019.

Following the completion of the initial implementation phase in March 2020, future phases will be dependent upon but not limited to an increase in the QFII, RQFII quota sizes, expansion in the China A Share universe of stocks accessible to foreign investors and the reduction in the barriers-to-entry via the QFII and RQFII access routes.

We acknowledge the efforts of the Chinese authorities to improve access to the China A market for international investors and will continue to work closely with them to transition China A Shares into our indexes.

2. Iceland

We’ve announced that Iceland will be assigned Frontier market status in conjunction with the FTSE Frontier Index Series annual review in September 2019.

We added Iceland to the Watch List a year ago for possible inclusion as a Frontier market, following the removal of the capital controls on new investment in Icelandic equities that had been in place since the Icelandic banking crisis in 2008/2009. Iceland now meets the five FTSE Quality of Markets criteria required for attaining Frontier market status within the FTSE Country Classification scheme.

3. Watch List additions

We have announced that the following markets are being added to the Watch List to commence the engagement process prior to a possible future reclassification:

Argentina is currently classified as a Frontier market and is being added to the Watch List for possible reclassification to Secondary Emerging market status.

Tanzania is currently Unclassified within the FTSE Country Classification scheme and is being added to the Watch List for possible inclusion as Frontier.

Vietnam is currently classified as a Frontier market and is being added to the Watch List for possible reclassification to Secondary Emerging market status.

4. Romania

Romania was added to the Watch List in September 2016 for possible reclassification to Secondary Emerging market status. In September 2018, the FTSE Russell Country Classification Advisory Committee endorsed the following criterion rating changes:

“Liquidity – Sufficient broad market liquidity to support sizeable global investment” was upgraded from "Not Met" to “Restricted,” following an improvement in broad market liquidity. “Off-exchange transactions permitted” – was upgraded from “Not Met” to “Restricted.”

The “Liquidity – Sufficient broad market liquidity to support sizable global investment” criterion is the single outstanding criterion required for attaining Secondary Emerging market status. FTSE Russell acknowledges the efforts of the Bucharest Stock Exchange to bring IPOs to the market and to improve liquidity levels on the exchange.

Romania is retained on the Watch List as a Frontier market and will be reviewed for possible reclassification as a Secondary Emerging market within the FTSE Country Classification scheme at the Annual Review in September 2019.

5. Reminder of previously announced country classification changes

Kuwait: reclassification from Unclassified to Secondary Emerging announced in September last year. The first 50% tranche is effective in September 2018 and the second 50% tranche will be effective in December 2018.

Poland: reclassification from Advanced Emerging to Developed, announced in September last year, effective at the September 2018 review.

Saudi Arabia: reclassification from Unclassified to Secondary Emerging, commencing from March 2019.

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